Personal Finance 101

By Rob Dickman-Lopez

In December 2006 I graduated from college with a net worth of negative twenty thousand dollars and no clue of how to handle my personal finances. I became a working professional and in my inaugural year, aimed for nothing and hit the bull’s eye with unbelievable accuracy.

Fast forward to today, I am 26 years old, completely debt free, steadily invest for retirement and build financial strength and stability with each passing quarter. In between I grew sick and tired of being a hamster on a wheel. I sought out real life personal financial advice from people whose plans worked. In the process I found that the fundamentals allowed me to dust off the rubble that was my financial mess and begin the climb towards financial peace.

Eliminate Debt…FOREVER

Our culture bought into the fairy tale that debt is a tool used to create prosperity. The truth is that debt was my gateway drug to overspending and putting other people’s names on my income. I used to believe that student loans were “good debt.” I didn’t rationalize that I was sending several thousand dollars of interest to my “friends” at Sallie Mae rather than eliminating the debt and sending several hundred dollars to my “friends” in D.C. By getting rid of my student loans, destroying my credit card and rejecting debt altogether I tell my money where to go rather than wonder where it went.

Live on a Budget

Before the start of every month my wife and I spend every dollar on paper. We plan every expense imaginable to minimize “gotcha” moments. The first few months were difficult as I looked in the mirror at my overspending habits. But over time we learned to prioritize our wants and needs and evaluated what it really takes to achieve our goals and dreams. Knowing that we plan to adopt a child makes our lowered standard of living that much more fulfilling.

Establish a 6 Month Emergency Fund

Unexpected emergencies can and will happen. In the past few years I have had three emergencies occur to the tune of at least $3,000 each. Emergencies are going to happen and if you are not prepared, credit cards and their 18% APR are all too eager to be prepared for you. The better plan I have found is to rely on an emergency fund to cover emergencies. No monthly payments, no receiving 3% cash back while paying 18%, just peace of mind.

Carry the Right Insurances

While the emergency fund will catch the smaller surprises, the right insurances in place will save you from the larger ones. Medical, dental, homeowner’s, auto and term-life insurances will pick up where the emergency fund ends. Plus, working together with the emergency fund, I have raised deductibles and lowered premiums. In choosing term-life over whole-life, I opt to pay the smaller premium and invest the difference rather than pay high fees for the privilege to have an insurance company keep my built up savings following my death. Which leads me to…

Investing

I keep my investment portfolio simple and precise. All investments are untouched for at least a five year period, this means money invested is off limits for immediate purchases, emergencies and splurges. Long term investments need time to grow and work through market cycles, as I have found that bulls and bears have the ability to rip your face off.

My portfolio is spread evenly across four types of mutual funds: Aggressive Growth (Small-Cap), Growth (Medium-Cap), Growth and Income (Large-Cap), and International. Funds that cause my jaw to drop in awe have been around at least ten years, have average annualized returns of 12% or more since inception and have a lead investment manager that has been with the fund for at least 5 years. I do not engage in day trading, futures, options, puts or anything that resembles legalized gambling. I want to put my money into valued investments that grow over time. Mutual funds invest in several hundred (even thousands of) companies. Whereas a single stock could collapse to penny status overnight, a respectable mutual fund spreads risk across several industries and companies. Through volatility a well researched mutual fund will maintain the value of your hard earned money and with the power of compound interest leave you with financial peace.

The bottom line is we have to be intentional with our money. We work too hard to turn a blind eye to our personal finances and fork over our investing decisions to an adviser more interested in collecting trading fees than helping us retire with dignity. Getting on a budget, living below my means, eliminating debt and sound investment planning has given me financial peace. These tools can and will do the same for you.

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